The Swedish economy is facing a new rope trick

press release

Stockholm September 20, 2023

Despite low growth and global concerns, the Swedish economy shows high activity. But it is not easy to maintain good employment opportunities and restore household purchasing power, while at the same time reducing inflation, according to the latest economic report from Handelsbanken.
“The Riksbank faces a particularly difficult balance of risks with an interest rate-sensitive economy, high inflation and a weak krona. Their focus will remain on inflation,” says Christina Niemann, chief economist at Handelsbanken.

Fiscal policy also faces critical choices. The state’s finances are strong, but the government may step into gas with caution regarding inflation.
“The government needs to pull off the rope trick of supporting families and social care, while at the same time not being able to pay for the cost increases,” says Christina Niemann.

Sweden’s economy is stronger than its reputation, but shaky
The Swedish economy slowed sharply during the second quarter in the wake of weak demand and eroding purchasing power. At the same time, housing construction fell sharply. Weak global demand means that exports are starting to slow.

Economists at Handelsbanken estimate that GDP will fall by 0.6 percent this year, remain unchanged next year and rise by 2.4 percent in 2025. Compared to the eurozone, growth was clearly weaker in Sweden in the second quarter, but considering To improve Since 2019, Sweden’s GDP has developed even stronger. Employment also increased further in Sweden.

“We can say that the Swedish economy fluctuates more than the eurozone, up and down, but the foundation is stronger than many people think,” says Christina Niemann.

Moderate recession next year
Despite negative GDP growth, employment rates continued to increase during the first half of the year to reach peak levels, and social partners took responsibility in a time of stress.

“So it’s hard to say we’re in a broad recession,” says Christina Neiman.

In 2024, economists at Handelsbanken expect labor demand to subside and the Swedish economy to enter a moderate recession.

Monetary policy is tight for another year
We expect interest rates to remain high until economic activity slows enough to keep inflation under control. The economy needs to succeed in the rope trick of maintaining employment rates and restoring lost purchasing power in households, but at the same time calming inflation through more moderate profit margins and higher wages, as well as boosting productivity. A soft landing is the hope in central banks’ battle against inflation.

“We expect that central banks will start gradually easing monetary policy only in mid-2024 and that the gradual decline in inflation will continue until 2025,” says Christina Niemann.

Stronger krone only next year
The Riksbank is forced to continue raising interest rates to fight inflation, but the krona remains weak. Economists at Handelsbanken expect two further interest rate increases, in September and November, to a key interest rate of 4.25 percent.

“The Riksbank will not start cutting interest rates until it feels confident that inflation is close to the inflation target. Our assessment is that it will be in September 2024.”

Only next year, when uncertainty about interest rates and inflation decrease, will the krona become stronger, according to the bank’s economists.

Household savings provide resilience
Households’ real disposable income fell by just over 3% between the first quarter of 2022 and the second quarter of 2023, the largest decline since the crisis of the 1990s. At the same time, household savings have remained at a relatively high level, which means that there are reserves remaining. In addition, households have already felt most of the rise in interest rates and their expectations for interest rates are relatively high.

“That’s why we don’t expect any sharp slowdown in consumption or any new decline in housing prices,” says Christina Niemann.

Mortgage rates are estimated to peak only at the end of the year. Only then will household incomes and housing prices slowly recover.

The cost blow is hitting major cities hard
Housing costs have risen across the country, especially in major cities. For example, for new mortgage borrowers in Sollentuna, outside Stockholm, electricity and interest costs are expected to make up 25% of income at the end of the year, compared with 8% in Örnsköldsvik.

Difficult choices for the government
The country’s strong finances, coupled with a low national debt, mean there is room for expansionary fiscal policy. It is expected that the 2024 budget will contain about 40 reforms 1 billion kroner, which is not particularly restrictive or expansionary – and its impact on inflation is marginal.

“Getting the economy on a soft landing is a difficult task. The need for care, schools and care will not fall because inflation is high, and even with the expected additions to the budget, the risk remains that savings may be needed to deal with the costs,” says Christina Niemann. Increasing.

Webinar link: https://www.handelsbanken.se/sv/foretag/placera/konkuntrikprognos

For more information contact:
Christina Nieman, chief economist, +46 707787765
Joel Holm, press secretary, +46 73 058 30 21

For the entire report in Swedish, see Economic forecasts And in English Global macro forecast
For more information about Handelsbanken, see: www.handelsbanken.com

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